What is the Repo Rate?
The Repo Rate
You might hear people on the news talk about it all the time. “The Repo Rate has gone up” or “the Repo Rate has come down”.
But what is the Repo Rate and why should you care?
What is the Repo Rate?
The repo rate is the rate at which the South African Reserve Bank (SARB) lends money to private banks like ABSA, Capitec Bank, FNB, Investec, Nedbank, Standard Bank and many others.
The organization at the South African Reserve Bank which is in charge of these changes is known as the SARB Monetary Policy Committee or MPC. It’s members meet at regular intervals and look at economic factors such as the value of the Rand and current inflation statistics. This helps them decide whether to (1) lower the rate (2) leave the rate as is or (3) increase the rate.
The law, particularly the National Credit Act and Regulations allows the various banks and credit providers to charge a higher interest rate than what they borrow money at. This enables them to make a profit from cients who come to them and borrow funds or use credit facilities.
So, if the repo rate goes up, the rate they charges customers (called the Prime Rate) also goes up.
The Rate You Pay On Your Credit
Most consumers agree to pay the banks interest on money they loan or credit they use that is ‘linked’ to the prime rate. This means that a change in the repo rate, affects the prime rate, and thus affects how much consumers have to pay each month.
A small change of even…a quarter of a percent can have big impacts on bigger loans or credit facilities. The impact is more noticeable.
This is especially true if the loan or credit is used over a long time period. The bigger the increase the more the impact will be.
‘The bigger the increase the more the impact will be’
Conversely, when the repo rate is lowered (it does happen), then the banks will lower their rates to consumers.
This means consumers will not be asked to pay as much towards their debts each month.
The repo rate impacts on all those who make use of credit. It also indirectly impacts on what they need to live or run their business. This means that they might adjust their prices to their clients. So, in many ways, the Repo Rate effects everyone.